BHP has advised Oil Search that it is not in a position to make a decision regarding a gas purchase for Olympic Dam at this time.

The gas supply was intended to replace Olympic Dam’s liquid fuel supply and to develop gas-fired power generation at Western Mining Corp project site.

Olympic Dam is a major shareholder in the gas project.

However, Oil Search said the remaining conditional supply contracts should be sufficient to underwrite the project, managing director Peter Botten said.

"While we are disappointed that Olympic Dam has not extended the conditional agreement; we believe the remaining conditional contracts are sufficient to underwrite the project, subject to the successful completion of Front End Engineering and Design. Work remains focused on converting the existing conditional contracts to firm and binding sales agreements and pursuing additional markets in the Northern Territory, Queensland and the southern states," Mr Botten said.

"The decision not to proceed with an agreement at this time with Olympic Dam will free up capacity and reserves to allow the PNG Gas Project to advance discussions with a number of other parties," said Rob Franklin, vice president for New Business Development at ExxonMobil Gas and Power Marketing.

In July, Australian Gas Light Company agreed to take a 10 percent stake in the project and to buy around 1,500 petajoules of gas over 20 years from 2009. Aluminium refinery Alcan has also signed a 20-year agreement to take gas from the project.

And oil and gas producer Santos, which has been in negotiations about taking a 9.4 stake in the gas project is close taking an equity stake in the project, which will take gas from PNG/Australian border to the Australian market.

"The project has substantial gas volumes under conditional agreement, and we are continuing to work to convert these agreements to binding sales contracts."

Pacific Islands Report is a nonprofit news publication of the Pacific Islands Development Program at the East-West Center in Honolulu, Hawai‘i. Offered as a free service to readers, PIR provides an edited digest of news, commentary and analysis from across the Pacific Islands region, Monday - Friday.